Is Rube Goldberg Managing State Pension Funds?

January 11, 2012

For immediate release (659 words).

Goldberg, Rube (1883–1970) U.S. cartoonist; creator of the comic strip character Professor Lucifer Gorgonzola Butts (an inventor of complex mechanical devices to achieve simple tasks).

It wasn’t mentioned in his State of the State message, but Gov. Daniels will leave for his successor a frustratingly complex and under-performing pension-management system.

That is so even though at first glance the contents of the 2011 annual reports issued by the Indiana Public Retirement System appear to offer positive news, both for the Combined Retirement Investment Fund (which covers state employees, including police, firefighters, judges and legislators) and for the Teachers Retirement Fund.

Specifically, the investment accounts for the state employees’ pension fund achieved a 19.9 percent return (net of fees) from July 1, 2010, to June 30, 2011, while the teachers’ fund grew by 18 percent during the same time period. Importantly, those investment returns far surpassed the annual growth rates assumed by the funds’ actuaries.

If you dig deeper, however, as few in the news media or the General Assembly are willing to do, it becomes clear that these numbers conceal important flaws in the state’s management of its public-pension obligations.

To begin with, it must be noted that during this same time period, the S&P 500 Index grew by 28.1 percent. This means that the state’s retirement system would have achieved almost a 50 percent higher return had it invested all of the funds’ money in an index fund that simply tracked the performance of the broad stock market.

I purchased shares in such a fund for my Individual Retirement Account for $7 through Scottrade. By contrast, the state retirement system paid Wall Street investment banks and international hedge funds $137,421,000 for professional advice that enabled it to significantly under perform the stock market. To put that figure in context, the system shelled out more for “investment expenses” during 2011 than it paid in actual retirement benefits for police officers, firefighters, judges, excise police, gaming officers, conservation enforcement officers, prosecutors and legislators – combined.

Furthermore, while the fact the investment returns for the state employees’ fund and the teachers’ fund  more than doubled those assumed by the funds’ actuaries for 2011, one good year does not a healthy pension fund make. In fact, according to its own figures, the state employees’ pension fund still has still not recovered the losses it suffered in the 2008-2009 bear market. Specifically, at the end of 2007, the market value of the state combined fund stood at $16,114,300,000. By comparison, its market value at the end of 2011 was just $15,976,600,000.

Had the fund grown at the 7 percent annual rate now being assumed by its actuaries, it would currently be valued at $21,122,560,000 – meaning Indiana’s pension fund for state employees is short by some $6 billion in expected investment gains, just since 2008. This shortfall, unless the stock market experiences a prolonged bull market, will eventually have to be made up by Hoosier taxpayers. Not to dampen your hopes, but the S&P 500 index actually declined in value during the second half of 2011, meaning the market will need to rally significantly for our state pension funds to meet their investment targets for even this year.

Why not eliminate the future threat to Hoosier taxpayers by making state employees responsible for managing their own retirement savings? Wouldn’t that be better than constructing a large and expensive bureaucracy that guarantees lifetime pensions to our public servants?  In other words, why not put state employees in the same type of 401(k) program that is now the norm for most private sector employees?

Such straightforward solutions ignore the need to ensure that legislators continue to receive campaign funds from public-employee unions in exchange for protecting fringe benefits that greatly exceed those offered in the private sector. And given that massive tax increases would be required to sustain these promised benefits if the state adopted a pay-as-you-go approach, legislators chose to construct a Rube Goldberg device built on the assumption that Indiana’s public-pension funds can win big at the stock market roulette wheel if they simply pay enough money to Wall Street experts to manage the bets.

It’s no wonder Governor Daniels left this out of his speech. Only Mr. Goldberg could be proud it.

Phil Troyer, a Fort Wayne attorney specializing in regulations related to employer-provided insurance plans, has served as an adjunct scholar for the Indiana Policy Review Foundation for more than 20 years. In 2010, he was a candidate for Congress and the Indiana House of Representatives.


Leave a Reply